Under the grantor trust rules, a person who transfers property to a trust and retains certain powers or interests is treated as the owner of trust property for income tax purposes. As a result, the income and deductions attributable to the trust are included in the grantor's income, and reported within his or her federal and state income tax returns. See Internal Revenue Code ("IRC") § 671.
- The powers and interests include, but are not limited to:
- controls beneficial enjoyment;
- retains administrative powers;
- revokes trust; or
- accumulates or distributes income for grantor's benefit.
A grantor is taxed on trust income if the grantor or the grantor's spouse retains the power to control the beneficial enjoyment of trust property or income. See IRC § 674.
A grantor is taxed on trust income if the grantor or the grantor's spouse retains administrative powers enabling the grantor to obtain, by dealings with the trust, financial benefits that would not be available in an arm's length transaction. See IRC § 675.
A grantor is taxed on trust income if the grantor creates a trust and reserves the right to revoke it. See IRC § 676.
A grantor is taxed on trust income that is or may be accumulated or distributed to the grantor or the grantor's spouse, or used to pay life insurance premiums on either the grantor's or the spouse's life. See IRC § 677.
Thus, a person other than the grantor of a trust, including a beneficiary, may be taxed on that trust's income if that person has a power, exercisable alone, to vest trust corpus or income to himself or herself. See IRC § 678.
